Welcome to the new world of 2022. It was just a month ago when we peered ahead into this year and speculated that Q1 would be a difficult one for the markets. Sadly, this has now transpired in spades. The major US stock market indexes had been down anywhere from -6% on the Dow to more than -15% for the tech-heavy NASDAQ. The up, up and away in prices we have seen since the COVID-19 Crisis started two years ago may very well be in the rearview mirror, yet, that is ultimately not a bad thing.

But let’s keep perspective; we are a mere 20 days into the trading! Although the calendar makes for an easy way to judge what is happen at any given time in the markets, such a short time frame is hardly ever a very valuable way to make a meaningful assessment of the big picture. And for most of our clients, it is the big picture that really matters.

One question that I like to float out during our discussions goes something like this, “If you had an extra $50k or $100k, or even $1M, how much would your life be different right now?” The answer, as you may have guessed, is always, “it wouldn’t,” or words to that effect. Not that we ever desire for you to move in the wrong direction with your investments. The point is to help provide a reasonable and realistic viewpoint when it comes to your money. Nothing like a cloudy lens to inspire us to make a lot of bad decisions when it comes to our portfolios! In a sense, we have to fight our emotions in order to get the best outcomes. So many times the right move in managing a portfolio is the exact opposite of what our gut is telling us. This, in my view, is the biggest hurdle to successful investing: removing feeling and emotion from the process. Everyone, and I mean everyone, struggles to do this.

As of the first of February, the markets are actually in a sustained downturn and have not immediately bounced back yet are off of the bottom. Pullbacks in the markets are a very normal occurrence as we all know, but that doesn’t make them fun to sit through. Yet, it’s the fact that prices fluctuate up and down which gives us the ability to earn a nice profit from our investments. Anecdotally, the discussions we have had with clients in the past two weeks would lead you to believe that the markets are in far worse shape than they are when you look at the numbers. This tells me that investors are feeling the pain of this drop in the markets substantially more than reality. Please keep this in mind as you look at your portfolio. More than a few people out there are quite uneasy about the world and their money, so you are not alone if you count yourself as one of those.

So why have markets been so rocky and remained lower to start the year? The answer to this lies squarely at the feet of Jerome Powell and the US Federal Reserve. It comes as no surprise to readers of our commentary just how much influence our government has had on the markets for the better part of 20 years. Overall, this is not a good thing – it takes away natural market forces and skews reality. Good investing is hard enough when our capitalist system is free to work; when you add the heavy hand of a few people into the mix, it gets even harder.

The Fed is finally turning the corner on the extraordinary amounts of money printing and support of a variety of markets, at least in what they say. In a sense, they have to talk tough on inflation and returning to a more normal state on monetary policy. We, like a few others in the world of investing, believe the Fed will not be able to do what they say, i.e. raise interest rates significantly, for a whole host of reasons. But nonetheless, the Fed is signaling to market participants that we are entering a new regime of less government support, something we wholeheartedly agree with and welcome.

Finally, during any downturn in the markets, we are always asked just how much of a drop will happen before the selling is over. Magnitude of move is nearly impossible to predict, but reversals and turns are much easier to spot. Several data points that we watch and consider reliable to the future moves of the markets would tell us a lot of selling has been done and that the bottom is close, if it hasn’t already happened (of course, we reserve the right to change our minds entirely if conditions warrant!)

“Toto, I have a feeling we’re not in 2021 anymore.”